Background. The research and experimentation tax credit is set to expire on December 31, 2005. Many taxpayers, as well as the Bush Administration, will support extension of the basic research credit.
Last year, as part of the previous extension of the research credit, the Senate unanimously approved an amendment to allow a new, separate tax credit equal to 20% of all amounts paid to support nonprofit, tax-exempt scientific research consortia. Many industries have such nonprofit research consortia – examples in the energy industry include the Electric Power Research Institute (EPRI) and the Gas Technology Institute (GTI). The proposed new credit would increase support for existing consortia, and encourage the formation of new research consortia.
The collaborative research credit proposal was dropped in the final 2004 tax bill, but has been reintroduced in the 109th Congress and will be considered in conjunction with the extension of the basic research credit. The proposal has not received much attention or support. Without stronger backing from affected taxpayers, the collaborative research credit will again be an easy provision to drop from the research credit extender.
Benefits of the Collaborative Credit Proposal. The new collaborative credit would benefit many companies substantially, including companies that currently gain little or nothing from the existing research credit because of its incremental character. The new 20% credit would be available beginning with the first dollar paid in support of a qualified research consortium each year. A company that pays $1 million, for example, to a qualified nonprofit research consortium would directly reduce its income tax bill for the year by $200,000.
The collaborative credit has been introduced in Congress several times. Foley & Lardner LLP has worked on this legislative project for a number of years and has gained substantial expertise in the issue. The collaborative credit has earned considerable support from Members of Congress who are made aware of it, and the think tank community supports it as a good way to encourage collaborative scientific research in the public interest. But the tax legislative "end game" each year in Congress has blocked enactment up to now.
This Year’s Opportunity. The underlying research tax credit requires another extension this year, and the full Senate is on record in support of the collaborative research tax credit proposal. We believe 2005 is a good year to make a significant push to enact the collaborative research tax credit. Foley & Lardner LLP has more experience with this issue than any other firm.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.